Tag Archives: China

how mature is the Macau gambling market today?

November 9, 2012 By in Asian economic development, Casinos, China, Current Market Thoughts, Entertainment, Industry Analysis Tags: , , , , , , , , , Leave a comment

A Hurricane Sandy note:  Still no internet at home–no sign of Comcast, either.  I’ve been using my phone as a mobile hot spot, but today Verizon failed as well.  Hence the late post.

maturing?

We have some indirect evidence from the recent actions of the Macau government, which has been especially careful to pace growth of casino operations in the SAR in order to avoid overcapacity.  The authorities have approved a total of five big new casino development plans for the Cotai area, with completion scheduled over the next three-five years.  That’s on top of projects already under way.  But although I think trust in the good sense of the government is justified by its behavior over the past decade, that’s a particularly slim reed to depend on in making an investment.

…not so much

a.  visitation

Luckily, there’s a substantial amount of tourist data compiled by the Macau Statistics and Census Service available to us.  The information below summarizing the casino penetration of various Chinese provinces is MSCS data that I’ve taken from the 3Q12 Las Vegas Sands quarterly earnings report.  I’ve reorganized the presentation a bit.

Over the 12 months ending September 30th,  11 million visitors came to the SAR from other parts of China.  Let’s assume they all came to gamble.

Guangdong:  Of that number, 8.1 million, or 74% came from neighboring Guangdong province.  Guangdong has a population of 104 million, so the number of visitors (I don’t think it matters that many people will have come more than once) equals 8% of the population.  The number of visitors from Guangdong grew over the past year, but by only 4%.

the rest:  Macau also draws from other provinces in eastern China, whose population totals 262 million, or 2.5x that of Guangdong. The number of visitors from those provinces last year amounted to 1.1% of their populations.  The visits break out as follows:

Hunan, 66 million people, 596,000 visits, 27% year on year growth

Zhejiang, 54 million people, 608,000 visits, 11% yoy growth

Fujian, 37 million people, 877,000 visits, 4% growth

Chongqing, 29 million people, 201,000 visits, 36% yoy growth

Shanghai, 23 million people, 422,000 visits, 11% yoy growth

Beijing, 20 million people, 426,000 visits, 14% yoy growth

Tianjin, 13 million people, 130,000 visits, 47% yoy growth.

The province that jumps out at me is Fujian, just to the northeast of Guangdong.  It seems to be showing the same flattening out of visitor growth seen with Guangdong, but at a visitation level  = 3% of the population vs. 8% in Guangdong.

If we think that the non-Guangdong provinces listed above will reach maturity at the Fujian level of 3%, then those provinces will yield another 5 million or so visitors over the next few years before growth flattens out.  That would imply close to 50% growth in visitors for the Macau gambling market before the industry would need to look to the other 2/3 of China for growth.

If we thought that Fujian is outlier of some sort, and Guangdong is a better model, then the non-Guangdong provinces could yield up another 17-18 million visitors, almost tripling the current size before the casinos have to look for new gamblers in the 2/3 of China Macau doesn’t yet service.

As with most things, the truth of the matter is probably somewhere in the middle.

One other note about the visitor numbers.  To some degree, the number of gamblers who come to Macau is a function of the amount of casino space available for them to use.  Until the past six months, the market seems to me to have been capacity constrained.  If so, the visitation numbers and growth rates we’re using could be uncharacteristically low.

In addition, the 12 months ending in September represent the worst period of the current post-Great Recession slowdown–another reason to think that the current visitation numbers represent less than the growth the market will see in coming years.

b. spending

Market revenue growth is a function of both the number of gamblers and of the amounts that they bet.  Growth in visitors over the past year was just under 5%.  But the amount won by the casinos over the same period was up about 15%, implying the average visitor bet 10% more than in the prior year.

In my experience, this makes sense.  The average amount bet in a given market rises in line with nominal GDP.  There’s no reason this should change.

c. adding a + b

If the number of visitors rises by 5% per year on average and the amount spent goes up by 10%, then the Macau market will experience 15% annual revenue growth.  If so, five years from now the number of visitors will still represent much less than 3% penetration of the six non-Guangdong, non-Fujian markets listed above.  And gambling revenue in the SAR will have doubled in size.  I think that’s a bare minimum.

Macau gambling: October 2012 results = an all-time record high

November 6, 2012 By in Casinos, emerging markets, Entertainment, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , Leave a comment

Last week, the Macau Gaming Inspection and Coordination Bureau released its report on “Monthly Gross Revenue from Games of Fortune” for October 2012.  Here are the figures:

* 1 HKD = 1.03MOP (Unit:MOP million )
Monthly Gross Revenue from Games of Fortune in 2012 and 2011
Monthly Gross Revenue Accumulated Gross Revenue
2012 2011 Variance 2012 2011 Variance
Jan 25,040 18,571 +34.8% 25,040 18,571 +34.8%
Feb 24,286 19,863 +22.3% 49,325 38,434 +28.3%
Mar 24,989 20,087 +24.4% 74,314 58,521 +27.0%
Apr 25,003 20,507 +21.9% 99,317 79,028 +25.7%
May 26,078 24,306 +7.3% 125,395 103,334 +21.3%
Jun 23,334 20,792 +12.2% 148,729 124,126 +19.8%
Jul 24,579 24,212 +1.5% 173,308 148,337 +16.8%
Aug 26,136 24,769 +5.5% 199,444 173,106 +15.2%
Sept 23,866 21,244 +12.3% 223,310 194,350 +14.9%
Oct 27,700 26,851 +3.2% 251,011 221,200 +13.5%
Source: Macau DICJ

Golden Week, an important celebratory and vacation period in China, comes in October.  So the month typically marks the yearly high point for casino revenues.  So, too, it appears, in 2012.  In fact, last month was the all-time high water mark for casino “win” (i.e., the amount lost by bettors, which is what the casinos count as revenue).

The October figure can be taken in two ways:

1. the positive viewpoint:  It’s a staggeringly high amount.  Macau casinos in the aggregate took in $3.5 billion during the month.  This would imply that gamblers put down bets totaling $70 billion+ over the period.  That’s roughly the GDP of either Indonesia or the Netherlands.  It’s also an all-time record for Macau, achieved during a period of austerity in China.

2.  the negative:  The year on year comparisons of Macau’s gambling revenue appear to have bottomed in July, with a +1.5% gain.  That was followed by +5.5% and +12.3% in the two succeeding months.  One might have hoped that the accelerating trend would continue in October, thereby providing more evidence that a market rebound is in progress.  It didn’t.  The yoy comparison of +3.2% is the weakest in recent memory, save July.

From an investment point of view, I find it interesting that the market has chosen #1, the bullish interpretation.  All the casino stocks spiked up on publication of the figures.  Not only that, but other stocks tied to a rebound in Chinese high-end consumer spending, like Chow Tai Fook Jewellery, did as well.

At the very least, the DICJ figures from May onward appear to be saying that the Macau gambling market is bouncing along the bottom.  Stock price action seems to imply not only Hong Kong market belief that the situation won’t deteriorate from the current level, but that a period of stronger growth is imminent.  If so, the biggest beneficiaries will be companies like Galaxy Entertainment and Sands China (I own shares in Galaxy and in LVS), which have recently opened new casinos in Cotai.

LVS’s 3Q12: a mixed bag

November 5, 2012 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , Leave a comment

Still no power at home.  Neither hide nor hair of the local utility–which had promised full power restoration by yesterday– spotted since the storm.  Some action, though.  It took down the web page where it made its pledge.

LVS’s results

After the New York close on November 1st, LVS announced its 3Q12 results.  The company reported worldwide revenue of $2.71 billion, up 12.5% from the $2.41 billion it posted during 3Q11.  Company EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), however, was down 5.1% yoy to $925.1 million.  The short story:  lower hold percentage around the world + higher allowances for doubtful accounts in Singapore.

Net income was $382.2 million, $.46 per share, vs. $444.8 million, $.55/sh, in the year-ago quarter.

LVS also announced an increase in the quarterly dividend from $.35/share to $.45, effective in 1Q13–implying a prospective dividend yield, based on pre-market prices today, of 3.9%!

details

strong in Macau

Sands China’s 3Q12 revenues came in at $1.64 billion, up 36.7% yoy.   EBITDA was up 24.3% at $485.6 million.  Net income, however, increased only 17.4% to $326.7 million.

The Macau market was up only in single digits during 3Q12, so there’s really nothing to complain about in the Sands China report.

The huge revenue increase comes principally from increased gambling capacity–the opening during 2Q12 of SC’s new property in Cotai.  Cotai Central produced revenue of $295.9 million in its first full quarter of operation, despite suffering from an unusually low winning percentage.  SC also benefited from a rebound from a bad-luck 3Q11 at the Venetian casino.

On the other hand, Cotai Central continues to lose small amounts of money as it slowly ramps up in the current environment of slow gambling growth in Macau.  And to some degree, it is drawing customers who would otherwise be patronizing SC’s other casinos.

My bottom line:  if–as I believe–the Macau gambling market has passed its cyclical low point and is beginning to expand again, SC is in a very strong position to benefit.

so-so in the US

Bethlehem, PA continues to perk along, posting EBITDA of $32.1 million, up 27% from the $25.2 million it recorded in the comparable period of 2011.

Las Vegas was also up somewhat, with EBITDA of $98.2 million vs. $94.3 million.  Table games play increased by 8.5% yoy, thanks to influx of baccarat players.  But those players were unusually unlucky, leaving behind $30-$25 million more than we should be counting on them to do on average.

My bottom line:  The way I look at it, Wall Street values the US operations of LVS as less than zero.  As long as the company can pay its bills and generate free cash flow–as it’s doing–the quarterly variations in EBITDA during the current prolonged slump in Las Vegas aren’t that important to the stock.

weakness in the Lion City

On the surface, gambling results from the Marina Bay Sands in Singapore look pretty ugly.  That’s mostly because the year-ago quarter was such a blockbuster.  It doesn’t help matters that Marina Bay’s winning percentage from the high roller market it caters to was a third less in 3Q12 than in 3Q11.  Less important in dollar terms, but still worthy of mention, Marina Bay increased its reserves against non-payment of gambling debts by an extra $15 million.

EBITDA for the three months was $260.8 million vs. $413.9 million during what we now know was a cyclical high point this time a year ago.  Adjusting for the abnormally low winning percentage in the higher roller business, EBITDA was flat, quarter on quarter.

My bottom line:  Singapore is a fledgling gambling market.  We have very little past experience to generalize from.  To perhaps state the obvious, the market appears to be considerably more economically sensitive than I would have imagined.  That’s a negative.  If, however, a “bad” year means generating EBITDA of $1 billion and a “good” year means EBITDA of $2 billion–which would be my best guess at present–then Singapore is still a market that casino operators should be pounding down the door to get access to.

the stock

At current market prices, LVS’s ownership interest in Sands China is worth about $24 billion.  Its holding in Marina Bay is worth $18 billion, if we assume that it would trade at a 25% PE discount to Sands China and based on average annual EBITDA of $1.5 billion.  If so, the market is still valuing the US operations of LVS at around negative $5 billion.  This is way too cheap, in my view, especially given that the Macau operations, the largest single source of value for LVS, appear to be at or near the start of a cyclical upturn.

Wynn Resorts’ 3Q12: Macau (HK:1128) flat, Las Vegas picking up, big dividend

October 26, 2012 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , Leave a comment

the 3Q12 earnings report

WYNN reported earnings for 3Q12 after the market close on October 24th.

Revenues came in at $1.2985 billion, flat with $1.2983 billion collected during 3Q11.  Net income was $149.2 million, 12.5% higher than the $132.6 million posted in the comparable period last year.  Due to a sharp reduction in share count from 125.9 million to 100.9 million, eps showed a much sharper 41% increase, at $1.48 vs $1.05. (The shrinkage in outstanding shares is due to the forced cancellation of 24.5 million shares formerly owned by Aruze USA.)

Results exceeded the Wall Street analysts’ consensus eps estimate of $1.34.

WYNN also announced a special dividend of $7.50 a share to accompany the regular 4Q payout of $.50.  In addition, in its conference call the company said it would increase the regular dividend to $1/share, starting in 1Q13.

details

Property EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) for the quarter was $402.6 million, vs $381.1 million in 3Q11.  That breaks out into $292.2 million achieved in Macau and $110.4 million in Las Vegas.

Macau

If we subtract out from Macau results the portion owned by the investing public (including me) rather than Wynn Resorts, Macau accounts for about 2/3 of WYNN’s profits.  Over the past few years, Macau has also accounted for virtually all the earnings growth WYNN has achieved.

Wynn Macau earnings are now flattish, however, for several reasons:

–an economy-related slowdown in Chinese VIP gambling

–the opening of new casinos by competitors.  If nothing else, the novelty factor draws business to the newest venues, at least for a while

–Wynn Macau is at, or near, the capacity limits of its current physical plant.

Yes, the Macau government has given 1128 permission to build a new casino in Cotai, but that’s not scheduled to open until Chinese New Year in 2016.

In the meantime, we should expect no better than growth in line with the market for the Wynn properties in Macau.  But they will continue to generate huge free cash flow for shareholders and large management fees for the parent.

Las Vegas

EBITDA in Las Vegas is up by $25.2 million, or almost 30%, vs. 3Q11.

Most of the increase comes in casino operations.  About half the casino gain is from a return of the house “win” percentage to normal from last year’s unlucky lows.  The rest is genuine improvement in the amount of money wagered in the Wynn/Encore complex.  That’s a really good sign.

the dividend

As I mentioned yesterday, WYNN is in the unusual position of generating very high free cash flows, while having no current investment projects that need them.  WYNN is certainly not going to expand in Las Vegas, which is still plagued with substantial overcapacity.  The new Cotai project won’t need a lot of money soon, and it’s going to be financed mostly with debt, in any event.  Also, in today’s ultra-low interest rate environment, it makes little sense to repay cheap borrowings (arguably, one should be adding to debt, not subtracting).

So WYNN is electing to distribute much of its excess cash to shareholders.  1128 will likely soon follow suit.

buy or sell?

I hold both WYNN and 1128.   …LVS, too.  I think LVS is the cheapest of the three, and the only one I’d buy at today’s prices.

But I’m happy to hold the other two.  The Macau gambling market will likely be considerably better next year than this, although lack of capacity will be somewhat of a drag on 1128.  Las Vegas, where WYNN has considerably more operating leverage, will continue to make progress, I think.  And, as the cliché goes, with considerable dividend income I’m being paid to wait for earnings to accelerate.

what makes casino stocks interesting investments

October 25, 2012 By in Casinos, Dividends, Entertainment, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

I started covering casino stocks as a securities analyst around 1980.  At that time, Atlantic City was still the hot, fast-growing market that investors focused on, although the bloom there was already coming off the rose.  Las Vegas was a backwater.  Neither Singaporean nor Australian casinos existed (legal ones, anyway).  Macau, then a Portuguese colony, was a Ho-family monopoly.

In those days, casino operators basically gave away food, hotel rooms and entertainment.  Non-gaming operations were cost centers, existing solely to induce customers to visit the gaming floors.  That situation has changed dramatically over the years.  In pre-Great Recession Las Vegas, which is the gold standard for today’s global gaming industry, non-gambling operations had risen to equal importance–and profitability–with the gaming floors.

It’s not so much that I find the gambling activities themselves so interesting.  As a professional portfolio manager, they used to remind me a lot of work–but with substantially diminished chances of making money.

Instead, what attracted me to casino stocks as an investor–and still does– is that:

–casinos are very cash generative once they’re up and running, and

–they’re relatively simple to analyze.

Under most circumstances, growth in gambling revenue is a direct function of two variables.  They are:  the increase in nominal GDP of the area where target customers live; and any increase in casino floor space.  So gains in gambling earnings are highly predictable.   Resort profits aren’t as easy to project, but they’re not much more difficult, either.

One caveat:  like many commercial property-based businesses, expansion of Las Vegas-style casinos only comes in $1 billion-plus increments.  So the gaming industry can be subject to periodic bouts of overcapacity, when, after a run of profitable years, everybody in a certain area decides to make a major expansion at the same time.  Think of the current situation in Las Vegas–although that’s by far the worst overcapacity I’ve ever seen.

Funnily enough, it’s precisely the disastrous last-decade expansion in Las Vegas and the current slowdown of gambling in Macau, where the Big Three of American casinos (Wynn, Sands and MGM) all have operations, that make WYNN and LVS attractive.  (As regular readers will be aware, I’m not a fan of MGM.)

Why?  The companies are generating tons of cash and they have no place to plow it back in to new casinos.

In the case of LVS, this means it’s repaying borrowings much faster than I think the consensus realizes.  As for WYNN, the company has just announced a special dividend of $7 a share.  It’s increasing the regular quarterly payout as well, from $.50 to $1.  This means the shares have a prospective yield of  3.4%.

More on WYNN tomorrow.